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Well placed to benefit from demand normalisation

Bata India witnessed a revenue recovery rate (adjusted) reaching 80% in Q4FY21 vs. 74% in Q3FY21. Lower revenues from formal & fashion footwear continued to impact gross margin YoY though QoQ gross margins witnessed an improvement. Revenue fell 5% YoY to | 589.9 crore in Q4FY21. Aligning with the current demand scenario, Bata tweaked its product portfolio from formals & fashion categories to casuals, fitness & essential categories. Gross margins contracted ~570 bps YoY to 53.1% mainly owing to unfavourable product mix. Cost control measures led to lower other expenses. Subsequently, EBITDA margins declined 340 bps YoY to 19%. Absolute EBITDA declined 19% YoY to | 112 crore. Ensuing PAT came in at | 29 crore (down 22%).

Gearing up for recovery post difficult FY21

The impact of the pandemic has been severe on Bata in FY21 as its major product segments of formal and fashion footwear were negatively impacted by a change in demand pattern for footwear. Revenues declined ~ 44% YoY to | 1707 crore while EBITDA declined 80% YoY to | 161 crore. It reported a net loss of | 90 crore (FY20 net profit: | 327 crore). The company continued its efforts to accelerate the recovery by tweaking its product portfolio from Formals & Fashion categories to Casuals, Fitness & Essential categories covering comfortable sneakers, open & sandals styles. Also, Bata continued to focus on channel expansion through franchising, distribution and market places routes. The company has further strengthened its e-commerce and omni-channel facilities to cover pin codes across India. It has also continued to expand retail network in tier 3-5 towns via franchisee route by opening 10 new franchisee stores in Q4FY21 (total 228 franchisee stores) and appointing new distributors to cater to multi brand outlets.

Strong b/s to provide thrust to growth ambitions

On the balance sheet front, better working capital management resulted in release of cash worth | 204 crore. Bata continues to have a healthy balance sheet with surplus cash of ~| 1093 crore as on FY21. Strong brand bouquet, pan-India retail reach and sound financial position would act as enablers for Bata to benefit from liquidity stress faced by smaller unorganised footwear manufacturers thereby enhancing opportunity for market share gain.

Valuation & Outlook

Bata appears well placed to benefit from normalisation of demand. Strategies like cost reduction, higher focus on omni channel and calibrated expansion of retail network through asset light franchisee route can be structurally positive for Bata’s business. Bata’s healthy balance sheet provides it the required ammunition to expand its retail reach to benefit from demand revival. We believe Bata’s strong brand patronage, pan-India retail reach, would enable accelerated revenue recovery with revival in margins. We pencil 100 bps margin expansion to 28.2% and RoCE augmentation by 450 bps to 32.7% over FY20-23E. We upgrade the stock from HOLD to BUY with a revised target price of | 1925 (48x FY23E EPS, earlier TP: | 1680).

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